Sunday, October 23, 2011

Gamble With Your Own Chips

Feeling lucky? Rep. Nate Bell and the Highway Commission are, so why not vote to give them $575 million worth of your chips on Nov. 8th?

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Arkansans will be asked to take on more debt on
November the 8th when a special election will be held for a highway
bond issue. I have been opposed to the
plan, but in the back of my mind I had a reservation or two. The biggest reservation was the idea that
once a road starts wearing out, if you don’t spend a little money fixing it now
you have to spend more fixing it later.
It turns out that even without going into debt, we ought to be able to
prevent that from happening, for
reasons described here. I see this
as our chance to get out of this negative cycle of using debt for routine road
maintenance.

The other point was a half-reservation. Rep. Nate
Bell of Mena is a big supporter of the debt plan. He goes through the calculations comparing
interest paid to measured inflation in construction costs. His point was that construction inflation
was higher than interest rates during the four years of road construction
(2000-2004). In that accounting, we got
more road maintenance by borrowing and paying interest than we would have by
waiting for the money to come in. He
argues that with interest rates currently very low and possible inflation on
the horizon, we should vote for the debt and make that bet again.

It may be a valid policy position, but I would not
call it a “conservative” one, as Bell does.
Let me tell you what real conservative people are trying to do all
across this state right now- they are trying to pay down their personal
debt. And as they struggle to pay down their
personal debt, here is what I think they don’t want- they don’t want
politicians pushing them to increase their public debt.

His whole argument is based on assumptions that
may not hold anyway. Take his assumption that the bonds will be issued at a
lower interest rate than the previous series was. In
the very similar 1999 bond series it took until 2002 before all the bonds were
issued. We don’t know what the interest
rates for bonds will be even next Spring, much less in three years. Most people don’t know it, but Germany had a
failed bond auction this week! Things
can change very fast, but once we give them permission to issue debt on our
behalf, they can issue debt. There is
no provision in the bond issue which says they can only issue the bonds if
rates remain low.

While I also expect inflation eventually, it is
also possible that there will be a deflationary collapse for several years and
that we could get the roads maintained even cheaper by stretching it out a few
years and avoid interest payments to boot.
Maybe we will get a President who
will let Americans drill for oil and it will go back down to $50 a barrel,
meaning that asphalt prices would face downward pressure. We just don’t know. I just know that this is not a good time to
take on a bunch of additional debt.

But more importantly, statistics from Bell himself show just
how unnecessary the whole debt program is.
The revenue streams devoted to bond repayment on a similar program are
around $74 million a year. That is for
a total of $575 million in loans. If we
just let the $74 million a year come in rather than pledge it for collateral,
we would have over half of the $575 million in just four years and we would not
owe a penny in interest! And in the
original 1999 program on which this debt issue is based, it took them three
years to float all the bonds and get that $575 million! The interest costs on that bond issue was
over $200,000,000- about 40% of the principle amount.

Rep. Bell notes that the
debt plan is only 5% of projected AHTD revenues. Combine that with the fact
that we could get half the $575 million within four years just by letting it
come in rather than pledging it to bonds and you have to wonder why they couldn’t
just move some money around to get a lot of the proposed construction done in
the next four years without resorting to a bond issue.

Bell claims that even if the feds did not send in the projected highway funds, there would not have to be a tax increase because this bond issue is only 5% of the projected AHTD revenue stream. He said they could just slow some stuff down and move money around and cover things without a tax increase. If that's so, then WITH the money coming in they ought to be able to find a lessor amount somewhere to combine with that money and get the job done without debt. This would leave us over $200,000,000 in interest savings that would put us in a strong position going forward. That would get us away from this cycle of
using debt for routine maintenance- hardly a “conservative” policy.

1 Comments:

I am amazed that so many self-styled "conservatives" want to go further into debt as the economy is collapsing. Especially based on the idea they can "win" by basically timing the interest market and the construction market. That they think they can repeatedly out-nimble the market using the clumsy mechanism of government debt is a testimony to their lofty self-image.